UPL - All regions doing well ex-Latin America - ICICI Securities

Highlights from Q3FY21 result: (1) All regions except Latin America have reported strong growth. Due to deferment of agri season, Latin America has reported a revenue decline of 8%; (2) change in revenue mix, cost-saving measures post-covid and synergy benefits helped EBITDA margin expand by 140bps YoY; and (3) synergy benefits are as per the company's stated plan and the net working capital days reduced to 117 in 9MFY21 vs 136 in 9MFY20. We model steady improvement in return ratios due to (i) synergy benefits and higher margins, and (ii) reduction in net working capital days. We model an earnings CAGR of 16% over FY20-FY23E with RoIC > cost of equity. Post 40% stock price performance over the past three months, we downgrade the stock to ADD from Buy with a DCF-based revised target price of Rs600 implying 12x FY23E (earlier TP: Rs540).

- Q3FY21 performance: Strong volume-led growth: The company has reported revenue, EBITDA and adjusted PAT growth of 2.6%, 9% and 50.2%, respectively, YoY. Volume growth was 7%, but realisations declined 1%, and there was 5% impact of forex fluctuations. Gross margin expanded 470bps due to improvement in revenue mix. EBITDA margin expanded 140bps YoY.

- All regions ex-Latin America performed well: The company has reported strong growth in Europe (30%), Rest of World (6%), India (21%) and North America (5%). However, due to delay in agri season, UPL's revenue declined 8% in Latin America. The company is confident of recouping the lost revenue in Q4FY21.

- Synergy benefits on track as per plan: Cost synergy benefits worth US$109mn were achieved in FY20 with additional US$79mn in 9MFY21. Revenue synergy benefits worth US$240mn were reaped in FY20 with additional US$114mn in 9MFY21. We note the company is on track to achieve its targeted synergy benefits in FY21-FY22E.

- Expect improvement in return ratios: UPL is working on three broad strategies to improve return ratios: (1) Improve revenues via market share gains, (2) improve margins via synergy benefits and lower input prices, and (3) reduce working capital days, which corrected to 117 at the end of 9MFY21 from 136 in 9MFY20. We expect RoE to increase to 14.4% in FY23E from 8.7% in FY20.

- Guidance maintained for FY21: UPL has maintained its guidance of 6-8% revenue growth and 10-12% EBITDA growth in FY21. Cost-saving measures initiated post-covid and synergy benefits are leading to EBITDA margin expansion. The company also expects to reduce net working capital days as well as net debt by FY21-end.

- Downgrade to ADD: We model UPL to report revenue and PAT CAGRs of 8.4% and 16%, respectively, over FY20-FY23E. We remain confident of value creation with RoIC > cost of equity. However, with 40% stock price performance over the past three months, we downgrade the stock to ADD from Buy with a revised target price of Rs600 (12x FY23E; earlier TP: Rs540).

Shares of UPL Limited was last trading in BSE at Rs.560.15 as compared to the previous close of Rs. 565.7. The total number of shares traded during the day was 400306 in over 8652 trades.

The stock hit an intraday high of Rs. 575.95 and intraday low of 557.2. The net turnover during the day was Rs. 226159295.

Source : Equity Bulls

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